Market Trends

Fuel Costs Exerting More Influence on Selector Development

Overall operating costs for commercial fleets increased 3 percent, on average, in calendar-year 2007. The increased expense was directly attributable to the cost of fuel. The price of a gallon of regular unleaded gasoline increased almost 7 percent over the record-high prices in 2006.

The forecast is for more of the same. Last January, the Energy Information Administration (EIA) forecast that gasoline and diesel prices will average more than $3 per gallon in 2008. Last November, PHH Arval advised clients to increase their 2008-calendar year fuel budget to reflect a nationwide average price of $3.35 per gallon.

“I wouldn’t be surprised to see $4 a gallon gas in the Chicago area when the switchover to the ethanol-reformulated gasoline occurs this summer. Refined gas supplies are so tight that even minor disruptions can have immediate impacts on prices and availability, especially in the summer” said Greg Corrigan, VP, business intelligence for PHH Arval.

“At these cost levels, depending on the type of vehicle, fuel is vying with depreciation as the No. 1 expense for fleets,” said Corrigan.

Compensatory Strategies to Offset Fuel Costs

Fuel is now the No. 1 consideration for fleet managers making vehicle selector choices, according to Corrigan. “Over the past 18 months, we have seen a shift in this direction. We are starting to see fleet managers make fuel the first consideration in vehicle selection, above up-front cost and overall depreciation,” said Corrigan. “Plus, employee drivers are pushing to drive more fuel-efficient or environmentally friendly vehicles. A lot of fleet managers were surprised by this.”

As fleet managers start planning 2009 model-year selectors, pressure is increasing to shift to more fuel-efficient models. This is also reflected in the wholesale resale market, where more fuel-efficient compact cars are commanding higher resale prices.

Fleets are adopting compensatory strategies to offset higher fuel costs. Some fleets have established goals to increase overall fleet mpg. Fleet managers are reevaluating the placement of SUVs on selectors. Fleets are also reducing fuel spend by optimizing trip routing to avoid unnecessary travel and backtracking, said Corrigan. More fleets are adopting GPS systems to reduce fuel expenditures.

ValleyCrest Companies reports a 10-percent reduction in fuel costs since implementing a fleet-wide GPS system. Other fleets are attempting to minimize idling. Recent telematic data acquired reveals that fleets tremendously underestimate the amount of idling that occurs, said Corrigan.

Many fleets have increased personal use charges in reaction to higher fuel prices. The average personal use charge to employees was between $70 and $90 per month in 2005. Today, it ranges from $80 to $150 per month, with the average being $105 per month. The question is whether it needs to go even higher.

Many fleets are re-examining chargeback systems to determine whether personal use expenses are adequately recouped, said Corrigan. If the value of personal use is imputed as income, the employer does not recover any of the cost for personal use. However, if the employer and employee share the cost of personal use under a payment program, a fleet can significantly reduce its incremental operating costs. A 300-vehicle fleet charging $130 a month per vehicle would have an annual income of $468,000.

Contrarian Viewpoint

The contrarian viewpoint is that fuel will play no greater role selector decisions in 2009 than it has in previous years. The proponents of this position argue that since fuel is an integral component in lifecycle costing, it will play a significant role, but, they stress it is only one part of the overall lifecycle cost analysis.

Second, most fleet vehicles on today’s selectors are already the most fuel-efficient models available to fulfill the fleet application. The high cost of fuel will not have much impact on 2009 selectors since fleet application limits vehicle choices. If the job calls for a one-ton van, downsizing to a minivan is not the answer, despite the increased fuel economy savings. The contrarian viewpoint is that well-run fleets already have in place effective fuel management programs that optimize the cents-per-mile fuel efficiency of their vehicles. Fleets cannot control the price of fuel paid at the pump – it is simply the “cost of doing business.”

A Sobering Reality Check

However, the breathtaking increase in gasoline and diesel prices over the past six years gave all of us a sobering reality check on how quickly fuel can throw fleet costs out of kilter. From January 2005 ($2.03/gallon) to December 2007 ($3.00/gallon), the price of a gallon of gas increased 48 percent, which, on an annualized basis, is almost an additional $1,164 per vehicle driving 2,000 miles per month. Were these increased costs offset by increased resale values? No. The new “fleet reality” is being defined by fuel. Fleets need to elevate fuel management to the same status as depreciation management when making vehicle acquisition decisions.